On March 15, 2011, the Treasury published proposed regulations providing guidance on the IRS’s expanded authority to disclose information to appropriate state officers (“ASOs”) under Section 6104(c) of the Code, as amended by the Pension Protection Act of 2006 (the “Act”) . Section 6104(c) of the Code governs when the IRS may disclose certain information to an ASO about Section 501(c)(3) organizations (“charitable organizations”), organizations that have applied for recognition as charitable organizations (“applicants”), and certain other exempt organizations. Prior to the Act’s enactment, the IRS was only permitted to disclose a final determination denying an applicant exempt status, a final determination revoking a charitable organization’s exempt status, the issuance of a notice of deficiency of tax under Section 507 (the termination tax) or chapter 41 or 42 (which relate to excise taxes on prohibited activities), and, upon request of an ASO, returns and other information relating to any of these aforementioned disclosures.

The Act amended Section 6104(c) of the Code to expand the scope of information that the IRS may disclose to ASOs. Specifically, the amended provision permits the IRS to disclose the following additional information:

The issuance of certain proposed refusals to grant an applicant exempt status and proposed revocations of exempt status prior to administrative appeal and a final denial or revocation;

The issuance of a letter of proposed deficiency of tax under Section 507 or chapter 41 or 42;

The names, addresses and taxpayer identification numbers of organizations that have applied for exempt status under Section 501(c)(3); and

Returns and return information related to the proposed determinations and the identifying information of applicants noted above.

Generally, the IRS is only permitted to make these expanded disclosures upon written request from an ASO and only as necessary to administer state laws regulating charitable organizations. In contrast, the previously permitted disclosures relating to final determinations and notices of deficiency were automatic. However, the Act made the disclosure of returns and return information under Section 6104(c) of the Code subject to the disclosure, recordkeeping, and safeguard provisions of Section 6103 of the Code, which are designed to protect the confidentiality of such information. The proposed regulations provide that the IRS will not give automatic notification of any determinations or other information that may be disclosed under Section 6104(c) unless the disclosure, recordkeeping and safeguard provisions of Section 6103 of the Code have been met by the requesting ASO. The proposed regulations also state that the IRS may require an ASO to execute a disclosure agreement or similar document specifying the procedures, terms, and conditions for the disclosure or inspection of information, and provide that such an agreement will satisfy the written request requirement.

There is an exception from the written request requirement under Section 6104(c) of the Code, as amended by the Act, which permits the IRS to disclose returns and return information to an ASO on its own initiative if the IRS determines that such information might constitute evidence of noncompliance under the laws within the jurisdiction of the ASO. The proposed regulations take an expansive view of the IRS’s authority to disclose this information on its own initiative and without an ASO request and clarify that these discretionary disclosures may be made before the IRS issues a proposed determination (i.e. denial of recognition, revocation, or notice of deficiency), or takes other action. However, the proposed regulations limit the IRS’s ability to make these voluntary disclosures to an organization’s potential noncompliance with state laws that specifically regulate charitable organizations, rather than an organization’s potential noncompliance with more general state laws, and also require the IRS to determine when state laws may have been violated.

The proposed regulations also define key terms for purposes of Section 6104(c) of the Code, including “appropriate state officer”, “return”, “return information”, and “taxable person.” The IRS and the Treasury Department have requested general comments on the clarity of the proposed regulations, and have made a specific request for comments on whether the description in the proposed regulations of organizations to which these disclosures will apply lists all the organizations with respect to which ASOs might legitimately need information.